What Moved
On July 13, the Bank of Canada delivered a 100 basis point rate hike — a full percentage point increase to 2.50%. It was the largest single rate increase since 1998 and the most dramatic signal yet of the Bank's determination to bring inflation under control. The move stunned markets that had broadly expected 75bp (BoC, Jul 13, 2022).
The cumulative tightening since March was now 225 basis points in just over four months — an unprecedented pace of Canadian monetary tightening.
Housing prices accelerated their decline. The Toronto average was now down over $200,000 from the February peak, and the correction was spreading to virtually every Canadian market. Southwestern Ontario markets that had seen the largest pandemic-era gains were experiencing the sharpest reversals (CREA, Jul 2022; TRREB, Jul 2022).
The broader economic outlook was darkening. Rising rates, declining housing wealth, and inflation-eroded purchasing power were weighing on consumer confidence. Recession fears were building.
Private credit conditions continued to tighten. Borrower stress was increasing, loan extensions were becoming more common, and new origination volumes were declining as the housing market cooled.
What It Means
The 100bp hike — covered in detail in our event-driven analysis — was a watershed moment for Canadian private markets. The policy rate had moved from 0.25% to 2.50% in four months, and the Bank was signaling more hikes to come. The assumptions underlying virtually every private credit portfolio originated since 2020 were now being tested against a reality that no one had underwritten.
For MIC investors, the 100bp shock created immediate borrower stress. Variable-rate mortgage holders saw their payments jump overnight. Development projects with floating-rate construction financing faced instant margin compression. Borrowers who were marginal at 1.50% were in serious difficulty at 2.50%.
The silver lining — and it was important to note — was that disciplined managers with conservative LTV ratios still had substantial collateral cushion, even with declining prices. A loan originated at 65% LTV on a property that had declined 15% still had meaningful protection. The managers who had maintained these standards through the boom were now being vindicated.
For PE, the rate shock was primarily affecting deal flow and financing costs. Leveraged transactions were repricing significantly, with higher-quality assets holding up better than speculative ones.
Infrastructure investments — particularly those with contracted cash flows and inflation-linked revenues — were proving their value as defensive holdings in a volatile environment. Within the broader universe of alternative investments in Canada, infrastructure stood out as one of the few sub-strategies that benefited from both inflation linkage and demand resilience.
What We're Watching
Whether the BoC would deliver another outsized hike in September was the immediate question. Markets were pricing in 50-75bp, which would push rates above 3%.
Housing correction trajectory through the summer would determine the scale of private credit stress heading into the fall.
Borrower default data for H1 would provide the first comprehensive picture of how private credit portfolios were performing under stress. Early indications suggested that outright defaults remained limited, but the more telling metric was the rate of loan extensions — borrowers unable to repay on schedule but not yet in formal default. The gap between extension rates and default rates was a measure of deferred stress, and it was widening.
Five-year Government of Canada bond yields, which drive fixed mortgage rates, were also worth tracking. Their continued rise would further constrain the refinancing options available to borrowers in the private lending market.
Closing
July's 100bp hike was the moment that redefined the cycle. From this point forward, the question for Canadian private market investors wasn't whether the environment had changed — it was how to navigate a fundamentally different landscape where rates were high, prices were falling, and the assumptions of the boom era no longer applied.
For the full quarterly analysis, see Q3 2022: The Correction Accelerates.
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